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How NOT to Make a Financial Decision

In one of my favorite TV shows, How I Met Your Mother, Future Ted tells his future kids a piece of advice that his mother gave him as a child – “Nothing good happens after 2 AM”. Oh how true this is! When it comes to making financial decisions, it is imperative that you have a clear and focused mind. Given how hard we work for our money, a poorly made financial decision can come back to haunt us many times over. My own experience with this lesson happened on the weekend.

Live and Learn

I couldn’t sleep, so I figured I would get up and do something productive rather than stare at the ceiling. I decided to update my financial workbooks for the last week. After getting my tax refund and earning some extra income this year due to my freelance photography job, I realized I had some extra cash lying around. And since I had some new room in my TFSA open up for 2012, I decided to invest that cash into my TFSA mutual funds account. Normally, this would not have been a problem – and in fact, on this particular night, it was no problem. Within about 5 minutes, I had made the purchases and was on my way to bed. Of course, you never realize that nothing good ever happens after 2 AM until something bad actually happens after 2 AM. Tuesday morning rolls around, and I decided to check my account to make sure the investments went through without a hitch. I opened up my TFSA account to find out that no new investments had been made. As I was about to hit the big red panic button on my desk, my financial spidey senses started tingling, and I checked my RRSP mutual funds account. Lo and behold, I was probably a lot more tired than I gave myself credit for, and in my 2 AM stupor, I invested all the money into my RRSP instead of my TFSA.

Head Slap!

After banging my head on the desk for a few minutes, I pulled myself together and called the bank. Realistically, this wasn’t the end of the world – I have the RRSP contribution room, but given my current income situation, there is really not the optimal time for me to be contributing to my RRSP. I’m better off right now contributing to my TFSA and saving the RRSP room for a future day when I’m above the lowest tax bracket based on my calculator. The bank said there was nothing they could do over the phone – I had to fax in a letter to their investment services division, requesting a transfer of the purchases from one account to the other in writing and acknowledging that I accept any potential market losses that may be incurred. So I did that, and within 24 hours, the RRSP purchases had been reversed and moved to my TFSA. Thankfully, this was a financial decision that could be reversed and I am no worse for wear in the end.

Not All Financial Decisions Can Be Reversed

Unfortunately, you can’t call up the bank and say that you made a mistake when you bought your house. Or that you meant to buy AAPL and not AAP. Or that you meant to pay your Mastercard bill and not your Visa bill. I’ve done that last one before, also a late night blunder. You would think that would be easily reversible – alas, when Visa gets your money, they ain’t giving it back without a fight. Financial decisions, big or small, can have serious repercussions if made incorrectly. Sure, a lucky mistake could wind up benefiting you. But they could also cost you big – literally. The last thing you want to do is lose contribution room on your retirement plan, lose money on an investment mistake, or worse, saddle yourself with a huge debt.

Steps to Making a Good Decision

According to MindTools.com, there are 6 steps to making a good decision:

Create a constructive environment

Generate good choices

Explore the choices

Choose the best choice

Check your decision

Action

Creating a constructive environment is the very first thing on that list, and its what I failed to do by making my financial decision at a time when I shouldn’t have been. That set me up to take bad actions right from the very beginning. So the next time you are making a financial decision, take two seconds and ask yourself – am I in the best frame of mind to make this decision? If not, delay it an hour or a day. And remember, nothing good ever happens after 2 AM!

20 thoughts on “How NOT to Make a Financial Decision”

This is so true about many choices–make sure you get a good nights sleep before making them. And don’t look for jobs at this time either–you might think it’s a great idea but chances are that it’s really not.

Love the show and definitely agree with the sentiment. Can I ask why you choose to invest in mutual funds at all? What advantages do you find that they have over ETFs now that there are commission-free ETFs available?

Convenience mostly…
I don’t currently have an account set up with an online brokerage firm and I don’t have the time at the moment to figure that out. Its on my list of things to do for the fall once I finish school. The mutual funds I’m invested in are low-cost index funds that I can buy right from my online banking page with little effort, so the minimal commissions are worthwhile for the convenience I have in buying them at the moment. But I am aware that it is not necessarily the best investment I could be making and its something I plan to rectify before the year is out. That said, its a better investment than having the money sitting in my chequing account 😀

It’s amazing how easy it is to make one little mistake like that! I wound up with almost $50 in bank charges one night because of one little click of a mouse (Paypal tried to pull funds from my bank account rather than my credit card, and I had no funds in that account – OUCH!). My bank graciously reversed them, but it would have been a painful lesson otherwise.